The biggest challenge is space, not really sure where to put a furnace inside the property and there's a good chance it will have to be placed outside.

That’s absolutely the worst approach to get your way

We take a friendly approach but always let folks know up front, “we will evict you“ If uou dont pay rent.

What are the challenges/obstacles in doing so?

It is still a little challenging to make the numbers work however.

The husband approached me around July 12th and asked if he could move back into the apartment after she left.

Even when I run the numbers with a 25% down payment, I am having difficulty seeing anything that would even approach a positive cash flow using rough parameters like the 50% rule, except rarely in a class-D "warzone" neighborhood in which I'd be wary to go for a run even in daytime. 

we have made advanced payment for material and other stuff. how should we approach about getting that money back from him?

This depends on what approach is right for you.

Challenges are a gift.